When the Federal Reserve decided to loosen monetary policy in September 2007, not many people criticized it. The vote was unanimous. Few congressmen said anything about the move. Three years later, inflation was lower and unemployment higher than in 2007. But the Fed’s move to loosen money in mid-2010 aroused fierce opposition from conservative politicians, economists, and journalists. Sarah Palin complained that “printing money out of thin air” would “erode the value of our incomes and our savings.”
Republicans and conservatives have started to take a much harder line against inflation and a Federal Reserve they consider too inclined toward monetary expansion. In the early 1980s, supply-siders would sometimes criticize Paul Volcker’s Fed for fighting inflation too vigorously. Few on the right say anything similar today.
This rapid shift in positions has several causes. The view that overly loose Fed policy contributed to the housing bubble of the last decade became the conventional wisdom. The massive expansion of the money supply in the wake of the financial crisis alarmed many observers. But the shift in position was also a testament to Representative Ron Paul’s dogged campaign against the Fed and its allegedly inflationary ways, and for a gold standard. If not for the Texas Republican — who has long been the congressman most interested in monetary policy, and now chairs the subcommittee with jurisdiction over it — it is hard to imagine that Newt Gingrich would have proposed a new commission to examine the gold standard, or accused Fed chairman Ben Bernanke of being “the most inflationary, dangerous, and power-centered chairman of the Fed in the history of the Fed.”
Many Republicans tell pollsters that they will not vote for Paul because of his foreign-policy views. Nobody says that his monetary views are a deal breaker; no pollster even bothers to ask. There is no organized opposition to Paulite views on money within the Republican party or conservative movement, and the people who hold those views hold them intensely. Thus the progress of those views.
Yet Paul’s views are a long way from dominance. The next Republican president’s appointees to the Fed will not insist that the money supply never increase. Most of the economists in his administration will not be supporters of the gold standard, or opponents of the Fed’s existence. What Paul has accomplished is to set a tone for the economic-policy debate on the right.
In End the Fed, his 2009 book, Paul writes that a rotten monetary system underlies “the most vexing problems of politics.” In his view, any expansion of the money supply counts as inflation, whether or not prices rise. (That’s also the definition Gingrich is using, since Bernanke can’t be convicted of record inflation defined as price increases.) If prices stay flat after an expansion, it means that they would have fallen without it. The expansion is thus a form of theft from people who must now pay higher prices than they would otherwise pay, and especially from savers, whose money becomes less valuable than it would otherwise be. Expanding the money supply thus discourages saving and encourages consumption. Paul goes so far as to say that it is the Fed that has led to people’s being “enslaved to their high credit card debt, the college loans, their car and home loans.” This “personal fiduciary bondage . . . simply could not be part of a free society with sound money.”
Paul follows the Austrian school of economics, which holds that the expansion of the money supply (or, in some variants, the overexpansion of it) is the reason we suffer through business cycles. Loose money artificially lowers interest rates and misleads businesses about the demand for capital goods, causing them to invest in the wrong lines of production. Eventually the “false” or “illusory” prosperity of the boom gives way to a bust in which these malinvestments have to be painfully liquidated. Efforts to mitigate the pain merely prolong the necessary process. In End the Fed, Paul treats the entire period from 1982 through 2009 as “one giant financial bubble” blown up by the central bank. (At one point he dates its beginning to 1971.) Absent his preferred reforms, “we should be prepared for hyperinflation and a great deal of poverty with a depression and possibly street violence as well.”